David Hurford, CEO, Fairheads Benefit Services

 

How many more times must we read in the news about the theft or misappropriation of Road Accident Fund or medical negligence claims – money meant for the victim, stolen by those who were charged with protecting it.

 

The victims are often financially illiterate and comprise the most vulnerable sector of society, especially when it comes to RAF claims affecting the injured or disabled, all the more so when these are children.

 

The case of Zuko Nonxuba, an Eastern Cape attorney who is alleged to have lodged fraudulent claims in the millions of rands, is just one example. Simply Google the Road Accident Fund and there are countless cases, perhaps not as extreme, where the money meant for the victim has instead been stolen by unscrupulous attorneys, financial advisors and even trust practitioners.

 

One of the more laughable defences put up by one of the perpetrators is that because the child had died, they had no further rights to claim the benefit!

 

The RAF itself is an organisation in disarray with corruption rife. Recently, despite a Constitutional Court ruling in October compelling the RAF to resume and honour payment of claims lodged on behalf of medical scheme members injured in road accidents, it is refusing to do so.

 

While all this is a symptom of the deeply rooted corruption that exists in our country, it is frustrating that the courts responsible for RAF/medical negligence claims do not step in to make the changes which can prevent this kind of abuse.

 

How does it work?

 

Typically, where a court orders the RAF or State entity to pay a benefit to a minor who has been the victim of a road accident or other medical negligence claim, the order stipulates that the benefit should be held in trust and used for the medical and other expenses that they will incur. In most cases, this creates an opportunity for the attorneys to earn further “commissions” from trust company providers to establish a new trust – which of course would be in the interests of the attorney. For the service provider however a stand-alone trust is often an expensive and time-consuming task, with fees being deducted from the beneficiary’s claim.

 

Some solutions

 

There are alternative, cost-effective vehicles which could be used to safely house RAF and medical negligence claims and we believe the authorities need to be educated about to raise awareness around them: beneficiary funds; and umbrella trusts.

 

For us, given their very high standard of governance and protection, the first prize would be for RAF and medical negligence claims to be paid into a beneficiary fund. Here, the Pension Funds Act would need to be amended to accommodate this.

 

See the advantages of beneficiary funds below.

 

But even if this is a bridge too far for regulators to amend legislation, these benefits should at the very least be paid into established umbrella trusts which have a long track record of serving the needs of minors and those with disabilities.

 

At Fairheads we manage both beneficiary funds and umbrella trusts on the same basis, although there are some differences regarding their regulation and the sources from which funds may flow into these vehicles. A brief summary of each vehicle follows below.

 

Beneficiary funds

 

A beneficiary fund is classified as a pension fund organisation and protected under the Pension Funds Act with oversight by the Financial Sector Conduct Authority. Members have recourse to the Pension Funds Adjudicator. There is a high level of professional trusteeship and investments which, in Fairheads’ case, are managed by best-of-breed investment managers.

 

A beneficiary fund can receive employment-related benefits, but there is no reason in my view why the courts cannot pay RAF or medical negligence claims into the vehicle.

 

The guardian or caregiver of a minor receives a monthly income towards the upkeep and education of the child and capital payments for school fees, medical bills, and the like  are controlled by the fund’s board of trustees. (In Fairheads’ case the trustees comprise 50% independent trustees and investments are outsourced at arm’s length to best-of-breed investment managers).

 

No tax is paid in the beneficiary fund and as the children are minors and not taxpayers, any payment out of a beneficiary fund, whether capital or income, is tax free.

 

Umbrella trusts

 

This vehicle is regulated by the Trust Property Control Act.

 

As the term suggests, an umbrella structure houses various sub-trusts, leading to economies of scale and other advantages which include:

 

• There is no need to register a new trust deed, enabling instant liquidity so that settlement can occur quickly and money can flow to the beneficiary;
• An umbrella trust, founded by a reputable provider, has a professional and experienced board of trustees in place to oversee the best use of the benefits;
• `the costs are low compared to a stand-alone trust, because these costs are shared by all the beneficiaries of the trust;
• Again at Fairheads, in line with best practice, investments are handled at arms-length by best-of-breed asset managers, with the board of trustees working together with an investment consultant.

 

Contrast these advantages with establishing a stand-alone trust, which involves the drafting of the deed, appointment of trustees, registration with the Master of the High Court and administering the trust, including all accounting and governance functions – let alone being responsible for the skilful investing of trust funds.

 

Conclusion

 

We will be bringing these advantages to the attention of the authorities and encourage the industry to join us.

 

Let us start the process and help to protect those who need it.

 

 

ENDS

 

 

This article was first published in the December 2023 issue of Fairheads Times.